It’s the most wonderful time of the year for those expecting refunds, the craziest time of the year for accountants, and the most nail-biting time of the year for those who don’t know what they’ll be getting back from the government. Yes, it’s officially tax season! To get the lowdown on some common myths that float around during this time, we interviewed an accountant who deals with commercial and personal clients.
Here are 9 of the most common myths about tax time:
#1: Myth for Business – You have to file by the personal income tax deadline
Sole proprietors and their spouses (or common law partners) do not have to file until June 15, 2016. But keep in mind that if you do file after April 30, 2016 your GST/HST credit, Canada child care tax benefit payments, and old age security benefit payments may be delayed.
#2: Myth for Business – Pay income tax before GST
Income tax may look like the biggest bill and you may want to pay it off right away. But if you have limited funds and must make a choice, pay your GST bill first. The income tax and GST/HST departments are separate divisions within the Canada Revenue Agency. HST/GST deadlines are firmer and their collection departments are much more aggressive.
#3: Myth for Business – I can do my own bookkeeping
Simply put, no, you can’t do your own bookkeeping. A good bookkeeper is worth getting for both your sanity and the sanity of your tax accountant. If you aren’t a bookkeeper by trade, you may make mistakes or not catalogue receipts correctly, which could end up costing you more fees for your tax accountant to sort it out.
#4 Myth for Individuals – It’s OK to leave a slip out, the CRA has it on file anyway
Nope. CRA will levy penalties when a slip is missed. It gets worse if it happens two years in a row. If you have investment income (T3 and T5) it is best to get everything to your accountant around the first week of April – this may mean you have to call your T3 providers and harass them to get you your slips early; T3’s aren’t due until March 31. Your T4's and T5's are due Feb 28.
#5 Myth for Individuals - My financial advisor says I have lots of room in my TFSA
Not necessarily. It's wise to leave one year's cushion (currently $5,500) of room. If you move from bank to bank or pull out cash, CRA will see the money going in, but not the money going out for at least a year. The penalty is 1% per month. Ask your tax accountant after you talk to your financial advisor to be safe.
#6 Myth for Individuals - You should always max out your RRSP's
If you are in a low tax bracket, it is not really worth it. If you are in a higher tax bracket, it is. Talk to your accountant to determine if you should be doing this.
#7 Myth for Everyone – There are no tax advantages to marriage
Not true. You get to combine medical expenses and donations. You get to do income splitting when you are retired, which is great if one spouse did not work or earned significantly less than the primary income earner. If you have kids, you are also eligible for the Family Tax Cut. Not many of these items are useful for young, newly married couples, but the benefits start once you have children or if you have significant medical expenses.
#8 Myth for Everyone – A credit and deduction are the same thing
No. A deduction lowers your income (if you are paying tax at 46% it will save you $0.46 for every dollar of deduction). A credit is a deduction at the low rate. No matter what your income is, a credit saves you 15% ($0.15 for every dollar).
#9 Myth for Restaurant Workers – Tips are not taxable
They definitely are. Subsection 5(1) of the Income Tax Act clearly states that all gratuities must be included in employment income.
Get in touch with one of our financial planners and we’ll help you create a personalized financial plan that will help you achieve all of your short and long term financial goals.